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Employment law

i Basic rule: No special rules for executives

Swiss employment law is primarily governed by the Swiss Code of Obligations. These rules apply to all employees, and, in principle, there are no special rules for executives. The employment law rules also apply to top executives, other than the members of the board whose legal relationship is outside of employment law for lack of a subordination relationship with the company.

While appointment and removal of executives from corporate functions, such as membership in corporate bodies, and related obligations, are governed by corporate law, the employment side of the relationship remains governed by the standard rules of employment law.

Some employment law rules are interpreted differently in case of executives, however. In particular, a higher degree of loyalty is expected of executives. In addition, some protective rules of the labour act do not apply to top executives, who do not benefit from rules on remuneration of extra work, among others.

ii Compensation

There is a principled distinction between two forms of compensation in Swiss law: salary and 'gratification'. The salary component consists of the sums periodically and unconditionally paid in cash by the employer (normally a fixed sum, sometimes a participation in profits, theoretically also a commission).

Modern compensation schemes for executives in Switzerland regularly provide for variable incentive schemes: short-term incentives and long-term incentives. Part of the incentive is often paid out annually, in cash, shares or other equity instruments. Another part of the compensation remains blocked for three to five years.

These compensation schemes normally provide for additional rules on adjustment of the compensation (malus or bonus) or its cancellation (forfeiture) or even repayment (clawback), in particular in case of breaches of the employment agreement, unethical behaviour, violation of a non-compete undertaking, or adjustments to the financial statements.

Such additional rules are generally enforceable under Swiss law if the incentive qualifies as 'gratification' and not as salary. The courts use several criteria to distinguish the two types of compensation. The most important are:

  1. A gratification can only exist if the employer has full discretion with regard to the payment of the incentive and its amount. If the amount of the incentive is determined by objective criteria (EBIT, sales, etc.), the incentive qualifies as salary.
  2. The incentive is an accessory to the base salary, and not the main portion of the compensation. Otherwise part of the incentive will be re-qualified as salary. This second criteria only applies if the total compensation does not exceed five times the median salary in Switzerland in the relevant year (i.e., approximately 380,000 Swiss francs).

If the incentive qualifies as salary, it must be paid unconditionally, and additional rules on blocking periods, malus, forfeiture and clawback are not enforceable.

iii Restrictions applicable to executives of listed Swiss corporations

The Federal Ordinance against Excessive Compensation in Public Corporations (Compensation Ordinance), which applies to Swiss-incorporated companies listed on a Swiss or foreign stock exchange (see VII below for details), prohibits certain forms of compensation of the members of the board of directors and executive management, including:

  1. severance; and
  2. certain bonuses in connection with M&A transactions.

The termination notice period for these individuals must not exceed twelve months. Fixed-term service or employment contracts must not exceed one year. Compensation (including salary, bonuses, benefits, etc.) can be paid during the notice period.

Members of boards of directors or executive management who intentionally breach the above rules may be subject to criminal sanctions.

For the binding annual say on pay vote, see Section VII.

The Compensation Ordinance further requires that the articles of association of the respective company limit the number of board and executive management positions that any director or executive may hold in other companies. The Compensation Ordinance does not stipulate a maximum number, though.